The Most Frequently Asked Questions For Mergers & Acquisitions

This is a document which serves to record the key terms of the deal, which have been agreed between the parties. They serve to focus the attention of the parties but are generally not legally binding. The document should also help solicitors in drafting the agreed terms without too much need for further negotiation. The heads of terms will set out the details of what is being purchased; the price to be paid; the payment terms (i.e. whether payment will be in full on completion, or whether deferred for some agreed period); and the form of consideration (e.g. cash, or consideration shares).

Often, the heads of terms will include exclusivity and confidentiality provisions. Exclusivity provisions prevent the seller from offering to sell the business to another party whilst in negotiations with the buyer, whilst confidentiality provisions seek to protect the confidential information of both parties. Confidentiality provisions are likely to be of real concern to a seller, as substantial amounts of sensitive business information will need to be disclosed to the buyer and its advisers as part of the due diligence process. As a result, some sellers may require the heads of terms to be signed before any such information is released. In some cases, it may be that a separate confidentiality or non-disclosure agreement is entered into even before preparation of the heads of terms. Unlike the other terms of the deal, the confidentiality and exclusivity undertakings contained in heads of terms will be expressly stated as being legally binding.

It is important to take advice from your accountant and/or tax advisor as well as one of our specialist business law solicitors when you are considering selling your business as they will be able to advise on the best structure for the sale. An asset sale and a share sale have different effects for a seller (and a buyer) from both a legal and tax perspective.

In a share sale the buyer will acquire the shares in the company from which the business is traded. This means that the company retains ownership of its business, assets and liabilities and continues to operate and trade in its usual way without interruption, but with new shareholder owners.

From a legal perspective, sellers generally prefer share sales as all liabilities of the business remain with the company and the seller will achieve a clean break without having to wind up the limited company. In an asset sale a buyer acquires just the trading business (the goodwill) and associated assets that the seller and the buyer agree are to be sold.

In an asset sale, the buyer will cherry-pick which assets it wishes to acquire and will only agree that limited liabilities (if any at all) will pass to it. Generally speaking, most liabilities arising before the completion of the transaction will remain with the seller.

To this end, from a legal and tax perspective, buyers usually prefer asset purchases. Asset sales are appropriate for sellers who wish to sell only a part of their business or certain assets but wish to retain the rest. Whether a transaction proceeds as a share sale or an asset sale will ultimately be a commercial decision for the parties to the transaction but may depend on the following:

• the tax consequences for the seller and the buyer;
• the bargaining power of the parties – who wants the sale or purchase more;
• what is the economic climate at the time of the sale and purchase;
• what are the terms that are being offered;
• whether there would be any difficulties in transferring the business or any of the assets such as obtaining consent from regulatory bodies, third parties in respect of key contracts, landlords in relation to any property out of which the business is traded; and
• the existence of any extensive liabilities of a company.

If you are considering selling your business, it is important to plan ahead and take advice from the right professionals so that you understand the legal and tax implications of the sale structures which will enable you to find a structure best suited to you.

In short, yes, a shareholder can freely transfer his shares to another person provided there are no restrictions upon the shareholder from doing so under the articles of association of the company in question or any agreement between the shareholders (or otherwise) relating to the shares of the company.

The articles of association of the company and any shareholders’ agreements must therefore be checked before transferring shares to a third party. There are no restrictions on the transfer of shares included in the model articles of association for companies, but it is common practice for private companies to have bespoke articles of association which incorporate such provisions or for such restrictions to be contained in a shareholder agreement.

It is important to take advice from your accountant and/or tax advisor, as well as one of our specialist business law solicitors, when you are considering selling your business as they will be able to advise on the best structure for the sale. An asset sale and a share sale have different effects for a seller from both a legal and tax perspective.

In a share sale the buyer will acquire the shares in the company from which your business is traded. This means that the company retains ownership of its business, assets and liabilities and continues to operate and trade in its usual way without interruption. The only thing that changes is who owns the shares in the company.

From a legal perspective, sellers generally prefer share sales where they are selling all of the business, as all liabilities of the business remain with the company, meaning you would achieve a clean break and would not have to go through winding up the company. In an asset sale a buyer acquires the business (the goodwill) and associated assets to the business that the seller and the buyer agree are to be sold.

In an asset sale the buyer will ‘cherry pick’ which assets it wishes to acquire and will only agree that limited liabilities (if any at all) will pass to it. Generally, most liabilities arising before completion of the transaction remain with the seller.

To this end, from a legal and tax perspective, buyers usually prefer asset purchases. Asset sales are appropriate for sellers who wish to sell only a part of their business or certain assets but wish to retain the rest. Whether a transaction proceeds as a share sale or an asset sale will ultimately be a commercial decision for the parties to the transaction but may depend on the following:

• the tax consequences for the sellers and the buyer;
• the bargaining power of the parties – who wants the sale or purchase more;
• what is the economic climate at the time of the sale and purchase;
• what are the terms that are being offered;
• whether there would be any difficulties in transferring the business or any of the assets such as obtaining consent from regulatory bodies, third parties in respect of key contracts, landlords in relation to any properties out of which the businesses are traded; and
• the existence of any extensive liabilities of a company.

If you are considering selling your business, it is important to plan ahead and take advice from the right professionals so that you understand the legal and tax implications of the sale structures which will enable you to find a structure best suited to you.

What happens to your employees will depend on whether the transaction is an asset sale or a share sale. For a brief explanation of the difference between an asset sale and a share sale, see our FAQ ‘Should I sell the shares in my company or just the business and its assets?’ above.

In a share sale, only the ownership of the shares in your company will change and there will be no change of employer for the employees. Your employees will remain employed by the company after you have sold your shares on the same terms and conditions as when you owned the shares in the company. Any changes affecting or regarding the employees following completion would need to be effected by the company (under its new ownership and management) in accordance with applicable employment law.

Generally speaking, if you transfer your business (or part of your business) through an asset sale, and there are employees who work in your business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. TUPE gives your employees the automatic right to transfer their employment to the buyer and to continue to be employed by the buyer in the business following the sale. TUPE provides that the employees’ employment will transfer to the buyer on the same terms and conditions with no change to the employees’ length of service or benefits. TUPE lays down procedural steps that must be followed in relation to the transfer of a business. TUPE also applies to those persons who work in the business under ‘worker’ status.

It is extremely important that you take legal advice if you have employees (or ‘workers’) and you wish to sell your business, particularly where TUPE will apply. It is the responsibility of both the outgoing and incoming employer to ensure that TUPE provisions are complied with.  Severe penalties can be imposed by employment tribunals on both the parties for non-compliance and/or employee dismissals by reason of, or reasons associated with, a business transfer.

For advice on TUPE and other business-related employment issues, our team of dedicated employment solicitors are able to help.

What happens to employees will depend on whether you are buying assets or shares. For a brief explanation of the difference between an asset sale and a share sale, see our FAQ ‘Should I buy the shares in a company or just the business and its assets?’.

In a share purchase only the ownership of the shares in the seller’s company will change and there will be no change of employer for the employees. The employees will remain employed by the company on the same terms and conditions after you have purchased the shares as they were before your purchase. Any changes affecting or regarding the employees following completion will need to be effected by the company (under its new ownership and management by you) in accordance with applicable employment law.

Generally speaking, if the seller transfers its business (or part of its business) through an asset sale and there are employees who work in that business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. TUPE gives the affected employees the automatic right to transfer their employment to you (as buyer) on completion and continue to be employed by you in the business following your purchase. TUPE provides that the employment of those employees will transfer to you on the same terms and conditions with no change to their length of service or benefits. TUPE lays down procedural steps that must be followed by both the seller and buyer in relation to the transfer of a business. TUPE also applies to those persons who work in the business under ‘worker’ status.

It is extremely important that you take legal advice if you are purchasing a business and the business has employees or ‘workers’, particularly where the transaction is structured as an asset purchase (rather than a share purchase) and TUPE will apply. It is the responsibility of both the outgoing and incoming employer to ensure the TUPE provisions are complied with. Severe penalties can be imposed by employment tribunals on both the outgoing and incoming employer for non-compliance and/or employee dismissals by reason of, or reasons associated with, a business transfer.

For advice on TUPE and other business-related employment issues, our team of dedicated employment solicitors is able to help.

A contract can be transferred by a party to the contract in question either by assignment or novation.

Assignment is the process of transferring the rights of a party under a contract to a third party. Novation is the process of transferring the rights and obligations of a party under a contract to another third party. Unless an assignment is prohibited or restricted in a contract, a party may generally assign its rights under the contract to a third party without the consent of the other party to the contract. A person cannot usually assign its obligations under a contract meaning the obligations may remain with the original party.

A novation cancels the current contract with the existing parties and creates a new contract with the new parties and therefore generally requires the consent of all parties involved in the novation. The starting point, therefore, is to review your contract terms and to consider whether you are transferring only rights under a contract or transferring both your rights and your obligations. This will determine whether you are able to assign your contract (with or without consent) or whether you need to novate the contract. There are various ways in which an assignment and a novation can be effected and it is important to seek legal advice in this respect.

The typical way to protect your business name and logo with regard to goods and/or services that you provide within your business is by registering your business name and logo as a trade mark at the Intellectual Property Office.

Trade marks may also comprise slogans, symbols, colours and, interestingly, smells. Intellectual property is a complex area and often specialist intellectual property attorneys are needed to assist. We can help you in the registration of trade marks, but other intellectual property matters (including intellectual property disputes) may need to be dealt with by specialists in that field.

The short answer is no unless you have a contractual right to do so. You may have such a right in a shareholders’ agreement, option agreement or the articles of association of the company in which the shares are held. It is therefore important that you take legal advice before transferring your shares to another person for any reason.

Selling your business to the existing management team has a number of advantages, including that the existing management team has a clear understanding of the business. 

Given that the management team will already have working knowledge of the business, it is generally anticipated that the business owner will expect the management team to accept a larger degree of risk than would usually be expected of a third-party buyer. The result of this is fewer warranties and indemnities, meaning a cleaner break for the business owners.

The fact that the buyer in an MBO is the existing management team (or part of it) also means usually there will be a reduced due diligence exercise required. 

As the buyers are already part of the business, the due diligence exercise is likely to be considerably shorter than it would be in a sale to a third-party buyer. However, this does not necessarily mean that the transaction process will be materially shorter overall. Much of the time spent on a management buyout will be dedicated to the negotiation of warranties and, in the case of the buyer, liaising with any equity investors. The level of warranty cover that the selling business owners are likely to offer to the management team will generally be lower than on a sale and purchase between parties at arm’s length. This can cause issues for the buyers who may be ready to accept lower warranty cover but whose private equity investors may require comfort from more extensive warranties to ensure protection for their investment.

Funding will typically be a key part of a management buyout and this will often involve some kind of management equity (often in the form of a sacrifice of between six- and twelve months’ salary), bank funding, private equity, deferred consideration, or a combination of these. Private equity investors will usually want to exit and realise their investment within a five-year period, whilst a seller accepting deferred consideration will typically expect some sort of comfort that deferred payments will be forthcoming on the due dates for payment. This inevitably raises the question of what (if any) security the bank and/or private equity investor (as the case may be) will permit the buyer to grant to the seller and how any such security will rank in priority to payments due to such bank and/or private equity investor.

Management buyout transactions often also utilise earn-out provisions, with the consideration for shares potentially increasing and future payments becoming due to the selling business owners depending on the performance of the business in a period of one to three years post-completion of the management buyout.